The Bills of Exchange Ordinance [New Version] grants particularly broad protection to a person who qualifies as a holder in due course. Accordingly, a defense of failure of consideration (for example, where the goods were never delivered) raised between the drawer of the instrument (the person who issued the cheque) and the payee (the person to whose order the cheque was made payable) does not affect the rights of a holder in due course.
The question is whether a person who is merely a holder, but not a holder in due course, is entitled to similar protection in comparable circumstances. Reuven Reuven issued a cheque and delivered it to Shimon. Shimon endorsed the cheque to Yaakov in repayment of a pre-existing debt, but mistakenly signed the endorsement as “Shimu” instead of “Shimon.” . After the endorsement had been made, Shimon failed to perform his contractual obligations and did not deliver the goods. Reuven therefore instructed his bank to stop payment on the cheque.
Analysis: Yaakov is not a holder in due course because the endorsement in his favor was defective. He is, however, a holder for value.
Under the rule established in the Guiski decision, where the cheque was endorsed to Yaakov before Reuven’s defense of failure of consideration against Shimon had arisen, Yaakov was protected against that defense. Accordingly, Reuven remained liable to honor the cheque in favor of Yaakov.
However, on 24 November 2015, the Supreme Court of Israel, in Leave to Appeal 8301/13, T. Trading Corp. v. Bank Leumi Le-Israel Ltd., overruled the Guiski doctrine.
As a result, a holder who is not a holder in due course is no longer protected against a defense of failure of consideration, regardless of whether that defense arose before or after the endorsement of the cheque.
